The Parthenon Group: Systematic Drivers of the Market Values of Professional Sports Franchises

Parthenon

It may appear that franchises are bought for prices that have more to do with egos than with financial fundamentals: even teams with persistent negative earnings sell for hundreds of millions of dollars. But it turns out that there is a “method to the madness”, a systematic pattern that thoroughly links prices to current revenues, metropolitan area income (market potential), and historic team performance. Moreover, a careful strategy of managing revenue growth and re-investment in personnel leads to a virtuous cycle of higher performance, higher revenues, and then higher market values for the franchise when an owner eventually wants to become a seller. The reverse is also true: milking the customer for revenues without reinvestment leads to a vicious cycle of declining revenue, performance, and value. Examples from case studies of basketball and hockey data over the past two decades will be used to illustrate these conclusions.